The $35 Billion Advertising Agency Merger

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Omnicom Group (NYSE: OMC) and Publicis Groupe (NASDAQOTH: PUBGY.PK) announced they would merge with each other to form the world’s leading advertising and communication company, Publicis Omnicom Group. The combined company is estimated to be worth more than $35 billion, and jointly led by the CEOs of both Omnicom and Publicis.

Let’s take a close look at this merger deal.

Omnicom and Publicis snapshot

Omnicom is considered the leader in global advertising, marketing and corporate communication, operating in four main segments: advertising, customer relationship management (CRM), public relations and specialty communications. Most of its revenue, $6.76 billion, or 47.6% of the total revenue, were generated from the advertising segment. The CRM segment contributed more than $5.12 billion in sales while the public relations and specialty communication segments accounted for 9.1% and 7.3%, respectively, of the total 2012 revenue.

Publicis Groupe is based in France, operating in four main segments: advertising, digital, specialized agencies and marketing services (SAMS) and media. The advertising and digital segments were the two biggest revenue contributors, accounting for 30% and 33%, respectively, of the total 2012 revenue, while the SAMS and media segments represented 19% and 18%, respectively, of the total sales.

The merger deal

The merger  will create the biggest global agency with the strong network of more than 130,000 employees on five continents. Moreover, the combined company will have the deeper coverage across fast growing areas/countries. In 2012, the combined company had around $22.7 billion in revenue and $3.1 billion in operating income. The Earnings Before Interest, Taxes, Depreciation and Interest (EBITDA) came in at around $3.6 billion, with free cash flow of $2.6 billion. The merger synergies were expected to be around $500 million, including $260 million savings on third party services from increased scale and duplication elimination and $240 million savings from pooling of resources and infrastructure.

Investors of the two companies might be quite excited with their recently announced special dividend payments because of the deal. For each Omnicom share, Omnicom’s shareholders could get 0.813 shares of the new company and a $2 special dividend. For each Publicis share, investors could get 1 share of the new company and a €1 special dividend per share. Its payout ratio of the combined company is targeted to stay around 35%, higher than each separate company.

However, the deal might experience regulatory hurdles in both the U.S. and France because of the antitrust issues. The combined company produced around $11.4 billion, nearly double the revenue of its next competitor, WPP (NASDAQ: WPPGY). According to Ad Age DataCenter, on the global scale, Omnicom and Publicis combined accounted for 31.5% of the global revenue while WPP’s market share was lower, at around 22.8%.

Similar valuations among those three big agency companies

Currently, Omnicom has a slightly lower valuation than Publicis. Omnicom is trading at $63.50 per share, with a total market cap of around $16.40 billion. The market values Omnicom at 9.2 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization). Publicis has a bit higher EBITDA multiple. At $18.80 per share, Publicis is worth around $14.90 billion on the market. The market values Publicis at 9.56 times its trailing EBITDA. WPP is the most expensive business among the three. It is trading at $89.30 per share, with the total market cap of $22.20 billion. It is valued at around 9.62 times its trailing EBITDA.

The merger might be beneficial to Omnicom because of Publicis’ increasing exposure to digital media with the acquisitions of Digitas, Rosett and Big Fuel. Publicis ranked 18th with $2.2 billion in digital revenue. It expects to produce as much as 75% of the revenue in digital and emerging countries by 2018. In the digital media world, WPP ranked 7th, with $4.7 billion in digital revenue. Looking forward, WPP will shift its focus to digital in all of its businesses. It also wants to explore new digital opportunities through mergers, acquisitions and partnering with digital leaders such as Facebook, Google and LinkedIn.

My Foolish take

The combined company would have stronger pricing power and a decent marketing platform for the digital business, which has a lot of potential for growth. However, we should wait for the regulators’ decisions on the deal antitrust issues. Among the three, I also like WPP with its leading positions in both traditional media and digital media. Moreover, investors could also enjoy a sweet dividend yield at 3.30% at its current trading price.

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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